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ECONOMYNEXT - Sri Lanka is targeting 9 billion US dollars in foreign reserves by end 2018 helped by borrowings and import interventions, Central Bank Governor Indrajit Coomaraswamy said, down from 10 billion forecast earlier in the years.

Coomaraswamy said that reserves went up to nearly 10 billion US dollars following the sale of a sovereign bond earlier in the year, but fell down to 8.4 billion US dollars by end-July.

"We think we will finish the year with around 9 billion US dollars as far as the reserves are concerned. That’s a comfortable number, about 5 months of import cover," he said.

The country will get 1 billion US dollars from a syndicated loan negotiated through China Development Bank, with two tranches of 500 million dollars each expected in August and October, Coomaraswamy said.

“If everything goes well, there should be one more IMF transfer of 250 million US dollars,” he said.

Sri Lanka missed the net international reserve target under the IMF programme, and Coomaraswamy said that the Central Bank will do its best to negotiate a waiver.

Another 250 million US dollars will come from a panda bond before the end of the year, he said.

“We went on a non-deal road show in China. There seems to be good interest. We met banks, insurance companies and other institutional investors,” he said.

The loan will be obtained in yuan, and swapped for dollars, he said.

Meanwhile, the Central Bank is managing balance of payment pressures by influencing the treasury to tax gold and vehicle imports.

An official source meanwhile said that after building up a comfortable reserves buffer in 2018, Sri Lanka will opt for a round of borrowings in early 2019 to manage foreign debt maturities during next year.

Official reserves are made up of both Central Bank and Treasury balances. For the central bank to retain any dollars bought from banks, the rupee proceeds have to be mopped up.

The central bank ran out of Treasury bill in early 2018 and bank credit has since picked up. It no longer sells its own securties to mop up liquidity, so balance of payments cycles are now shorter.

In early 2018, the central bank forecast 10 billion dollars of reserves by year end, but even by that time, the central bank had run out Treaury bills, leaving it with no reliable tool to mop up liquidity. (Sri Lanka CB could buy US$150mn forex a month in 2018: Governor)

It is easy to collect forex reserves when domestic credit slows or contracts but it is more difficult to collect and retain reserves after a new credit cycle begins, especially when there are no tool to mop up liquidity permanently. After running out of T-bill, the central bank in this cycle mopped up some liquidity through term repo deals.

In March they were terminated laying the seeds for a minor run on the rupee. Now excess liquidity has started to build up again. Analysts say unless the liquidity is mopped up, more pressure may resume on the rupee.

Analysts have repeatedly warned that Sri Lanka's central bank has no answer to a credit pick up other than printing money to keep rates down or maintain excess liquidity at imprudent levels, putting presure on currency, triggering reserve losses or depreciation or both.

Over the last two week, excess liquidity has built up to 41 billion rupees and repo auctions have been halted, indicating that the outflows can resume. The central bank no longer sells its own securities to mop up liquidity. (COLOMBO, 3 August, 2018)